Buying Residential Property with a Discretionary Family Trust: Avoiding Extra Stamp Duty

All purchasers of real estate in Victoria must pay land transfer duty (more commonly known as stamp duty) to the State Revenue Office (“SRO”) in addition to the purchase price.

Generally speaking, stamp duty is calculated at not more than 5.5% of the purchase price or the market value of the property, whichever is higher.  However, there are some instances where additional duty is payable, and the most common occasion is where the purchaser is a foreign purchaser.  If a foreign purchaser is buying a residential property in Victoria, then an additional 8% duty is charged.  This means a duty of up to 13.5%, which is very significant.

To put it into perspective, a foreign purchaser will pay duty of $40,000.00 in addition to the standard duty of $25,070.00 on a purchase price of $500,000.00.

Here is an extract of section 28A of the Duties Act 2000 (Vic):

Rate for additional duty chargeable for foreign purchasers—residential property

(1) This section applies to a dutiable transaction under which a land-related interest in residential property is transferred to a foreign purchaser.

(2) In addition to the duty otherwise chargeable under this Chapter, duty is also chargeable at a rate of 8% of the dutiable value of the land-related interest in residential property.

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Who is a foreign purchaser?  Spoiler alert: it could be your family trust.

Section 3 of the Duties Act 2000 (Vic) defines a foreign purchaser as a person who is not an Australian citizen nor a permanent visa holder.  But a foreign purchaser also includes a company or trust in which a foreign person has a substantial interest.

It is relatively simple to determine whether a company, a fixed trust or a unit trust has a foreign person with a substantial interest, but that is not the case for a discretionary trust as the ‘class of beneficiaries’ is quite far-reaching.  Typically, a discretionary family trust gives the trustee the power to make capital and income distributions to a few named beneficiaries (usually the husband and wife) AND anyone even remotely related (eg: parents, step-parents, children and remoter issue, brothers, sisters, step-brothers and step-sisters, and the spouses of any of these people).

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Everyone in my discretionary family trust is an Australian citizen; so why does this matter?

Section 3B of the Duties Act 2000 (Vic) reads as follows:-

_{What is a substantial interest in a trust estate for the purposes of the definition of foreign trust?}

_{(2) If, under the terms of a trust, a trustee has a power or discretion as to the distribution of the capital of the trust estate to a person or a member of a class of person, any such person is taken to have a beneficial interest in themaximum percentage of the capital of the trust estate that the trustee is empowered to distribute to that person.}

This clause gives the SRO the ability to assume that a discretionary family trust is a foreign purchaser because it is possible that one or more of the beneficiaries are not Australian citizens.

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Up until 29 February 2020, the SRO had chosen to take a practical approach to enforce this provision and had assumed that a discretionary family trust is not a foreign purchaser unless it received information to the contrary.

However, that all changed on 1 March 2020.  The SRO is now choosing to change its approach and will assume that a discretionary family trust is a foreign purchaser unless the trust deed specifically excludes foreigners as potential capital beneficiaries.

If your family trust deed does not specifically exclude foreigner purchasers, then you will pay an additional stamp duty of 8% of the purchase price when your trust purchases a residential property in Victoria.

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I want to buy a residential property in my discretionary family trust; what do I need to do?

The safest process is to let us review your Trust Deed and any further amending documents BEFORE you sign a Contract of Sale.  We will then be able to advise you whether amendments are necessary, whether that amendment can, in fact, be made and, if so, how.

If you don’t want to miss out on a potential purchase while waiting for advice on your Trust Deed, let us look at your Trust Deed now in anticipation.

If you have already signed a Contract but haven’t settled yet, that’s probably okay.  If the Trust Deed needs to be amended and can be amended, it must be done before settlement so you will likely have a little bit of time up your sleeves.

It goes without saying that paying us to review and vary your Trust Deed is much cheaper than paying additional stamp duty of 8% of the purchase price, and we encourage you or your accountant to contact us in that regard.

To discuss the potential effect of this change in approach on you and your property purchases, please contact any of our Property Lawyers and we would be pleased to discuss your specific circumstances with you.

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